How Much Coverage Do We REALLY Need?

Many Singaporeans have a less than optimal level of life insurance. That’s quite unfortunate considering the fact that term insurance is reasonably affordable. A healthy 30-year-old can buy life cover of a million dollars for about S$1,500 per year.

If that’s all it costs, then why don’t Singaporeans adequately insure their lives? In fact, the “protection gap,” which is the under-insurance of Singaporeans at a national level, is a staggering S$462 billion.

A study conducted by the Life Insurance Association, Singapore, found that in 2011, the total life insurance coverage in the country was S$609 billion. But the “protection need” was much higher at S$1,193 billion, leaving a gap of S$462 billion after taking CPF savings into account.

Here’s an illustration explaining how the protection gap has been arrived at:

Why don’t people buy enough life insurance?

It seems simple enough. Life insurance costs very little and it’s a basic financial requirement. So, every Singaporean should calculate how much he or she needs and buy it.

But that is not the usual practice. Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore (MAS), explained why this happens when he recently addressed the members of the Life Insurance Association.

According to Mr Tee, there are three possible reasons for under-insurance:

Buying life insurance involves talking about, or at least referring indirectly, to the subject of death. Many people are averse to this.

There is a lack of clarity about how much life insurance a person needs. An individual may mistakenly assume that the coverage that has been purchased is enough.

Lastly, some people think that life insurance is a complex subject. They don’t even attempt to understand it. At times, life insurance is also perceived to be expensive.

Do you have adequate coverage?

Your individual circumstances will determine how much insurance you need. Say, you have taken an S$800,000 loan to buy a home. Your life insurance policy should cover this sum at the very least. Of course, that won’t be enough.

You will need additional coverage for your dependents. Do you have young children? The sum that you need for their education can be surprisingly high.

Many Singaporeans also help to support their elderly parents. After your parents reach a certain age, it is quite likely that they will need expensive medical treatment. They may even need home care facilities.

Finally, you will have to think about the type of lifestyle that you want to provide for your family if you are no longer around to support them. It’s important to be practical and arrive at a budget that is similar to your current level of expenditure.

Another issue that deserves attention is that insuring your life costs less when you are younger. As mentioned above, a 30-year-old could pay as little as S$1,500 per year for a coverage of S$1 million. But this same level of insurance could be twice as expensive for a 45-year-old.

However, individuals in their late 20s and early 30s often have other financial priorities. Their children may take up a significant chunk of their budget. They may even prioritise retirement savings over their life insurance needs.

That can be a mistake because buying life insurance at a later age can turn out to be more expensive.

Illustrative calculations

According to LIA, your life insurance needs can be broken up into various parts:

Every individual does a certain amount of household work. If you are no longer there to carry out these chores, there will be an additional financial burden on your family. While the amount for this will vary, LIA puts the figure for this expense at a level of S$5,616 per year.

Your housing loan will have to be repaid.

The total expenses on children can add up to a significant amount. This chart from the LIA study shows the amount that could be needed to raise and educate your children.

Although the figures are for 2011, they do give you an idea of the amount that will be needed.

Similarly, caring for your elderly parents can cost a tidy sum. To help you calculate your life insurance needs, LIA has developed a Protection Gap Calculator.

Simply enter your details to arrive at the amount of life insurance that you need to buy.

Let us see the amount of coverage that an individual needs according to the LIA’s Protection Gap Calculator:

Scenario 1

Scenario 2

Age of individual

35 years

35 years

Annual income

S$90,000

S$90,000

Children

7-year-old boy and 5-year-old girl

7-year-old boy and 5-year-old girl

Retirement funding for spouse

S$400,000

S$400,000

Parents

–

Father 70 years, mother 65 years

Housing loan outstanding

S$600,000

S$600,000

Life insurance coverage needed as calculated by LIA’s calculator

S$1,247,550

S$1,534,550

NOTE – for simplicity’s sake, we have assumed an annual cost of S$5,000 for each child and parent. LIA’s calculator builds in the education cost for children automatically.

It’s a good idea to try out the calculator yourself. It has a number of data fields that you can enter. In a few minutes, you will be able to arrive at a fairly accurate idea about the amount of life insurance that you need.

You may need even more coverage

The above estimates do not take critical illnesses into account. You may have an accident and require to spend weeks or even months in the hospital. During this period, your income may drop. There is also a possibility that you may not earn any amount at all.

It can be argued that the possibility of being involved in a serious accident is low or that you are unlikely to contract an illness that requires hospitalisation. However, the probability of the elderly needing expensive medical treatment is quite high.

Singaporeans have an average life expectancy that is well over 80 years. But their average healthy life expectancy is only 73.9 years. This implies that, on an average, practically every Singaporean will require expensive medical care in the last few years of life. If you have to provide for your elderly parents, it is advisable to take this fact into consideration when calculating the amount of life insurance that you need.

Author

Ravinder Kapur

Ravinder Kapur is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry in India for more than 30 years. His finance expertise includes the commercial vehicle, automotive, and construction equipment sectors, as well as corporate finance. His experience in these disciplines has included business development, credit analysis, risk management and financial recovery.